“Dealing With China” is a first hand account of a trusted advisor who maintains the Communist giant’s transformation to an economic superpower is as spectacular as it has been swift. Its author former US Secretary of the Treasury Henry M. Paulson Jr. believes China may have already outstripped the great run of the US after the civil war and they are not done yet. It is the land of superlatives. 

It is the biggest creditor of the US now, owning just under $1.3 trillion of its debt. The real issue is how does the US deal with China which seeks to challenge the US led order in Asia. The Dragon appears unwilling or unable to prevent the cybertheft of intellectual property from the US companies along with tightening its grip on Chinese society through an auhoritarian one party system of government that Americans dislike and don’t understand. 

What do the Chinese really want? Why are they spending so much money on their military? Are they friends or enemies, trading partners or commercial and geopolitical adversaries? The question uppermost in the minds of Americans is “how do we deal with China?” 

Having said that Hank Paulson as he is popularly known goes behind closed doors to witness the creation, evolution and future of China’s state controlled capitalism. His work in China over the last two decades has taken him to that country no less than a 100 times. 

He has worked closely with at least the last three administrations in China: Jiang Zemin and Zhu Rongji in the 1990s, Hu Jintao and Wen Jiabao in the early years of the century; and Xi Jinping and Li Keqiang at the present moment. Despite the inherent fears he maintains that the US will benefit from active engagement with China. 

The Chinese are formidable competitors but the “US should not fear competition or shrink from it.” At the same time China’s leaders know too well their country’s vulnerabilities. The “China model” has spawned a misconception of representing a better form of capitalism that is triumphing even as the US fades into decline. The pace of China’s prodigious growth is slowing down, making market reforms at once more urgent and difficult to achieve. 

The country’s 7.4 per cent increase in GDP in 2014 came in under the official forecast for the first time in 16 years — and many experts expect further decline in the growth rate. Meanwhile years of neglect has left the environment a near disaster that has sparked growing restiveness among China’s citizens. 

Given the US-China relationship no law is immutable. The key to avoiding hostile relationship is to get things done that benefits both the US and China. For all the potential flashpoints between the two countries, “we share far more interests — spurring global growth, combating climate change, maintaining peace and stability. It is imperative to turn common concerns into complementary policies and actions. Our task will be much more difficult, if not impossible, to solve if the world’s two most important economic powers work against each other,” stresses Paulson. 

As head of Goldman Sachs he played a pivotal role in opening up China to private enterprise. 

Deng Xiaoping had been the chief architect of the extraordinary changes sweeping China. With Savvy, will power, and relentless pragmatism he had shucked ideological chains to devise a unique brand of “socialism with Chinese characteristics,” introduced market principles and encouraged individual enterprise throughout the economy starting with agriculture and extending to industrial and financial areas. 

These initiatives begun in 1978 had been nothing short of spectacular. After the economic and political turmoil of Mao’s last years, China’s gross domestic product had soared by nearly double digit average annual increases for two decades, lifting hundreds of millions of people out of poverty. 

In February 1997 Paulson had flown from Hong Kong to Beijing a little on edge to meet Vice Premier Zhu Rongji, the country’s economic czar. Being the President and CEO of Goldman Sachs, his discussions with Zhu revolved on restructuring China’s telecommunications system through an offering of shares in a newly formed Hong Kong listed company. 

He (Zhu) had been plucked by Deng as Mayor of Shanghai and installed as Vice Premier in 1991. Officially the country’s economic portfolio fell under Premier Li Peng, Zhu ran the economy day- to-day and expected to succeed Premier Li Peng. 

Zhu had done a first rate job. When the economy overheated in 1993 he had taken charge of the central bank and put in place a series of tough austerity measures and smart administrative fixes battling inflation which would rise no more than 20 per cent before he guided China to a soft landing. 

The 15th National Congress of the Communist party held in September 1997 cemented the path of economic reform in China.To counter the uneasiness in some quarters about the rapidly growing role of private enterprise, Chinese leader Jiang Zemin asserted that the party did not control all aspects of the economy to stay true to its identity. 

When Zhu became Premier the whip hand driving reform became sharper than ever. He gave state owned enterprises three years to become profitable by cutting workers and upgrading technology or be restructured out of existence. He proposed cutting China’s army of 8 million bureaucrats in half and paring the number of ministries from 40 to 29. Three new ministries were created including one for labour and social welfare to deal with layoffs resulting from downsizing. Zhu’s aim was to move government out of business. 

Paulson maintains the way forward is for the US to benefit from the successes of China which is the fastest export market for America. Despite fears in the US, China is not an unstoppable power house that has invented a better economic model and will soon take over the world. 

On the contrary China’s economic system is sorely in need of an overhaul and has few imitators. Its political system has none. Either can lead to irrational responses and mistakes in the way one deals with China. If President Xi, one of the most powerful leaders in decades in China, and his fellow leaders seek what they call a “new model of great power relations” with the US, it is because they want to be treated like a major power while avoiding conflict as they continue to modernise and grow their economy. 

Xi told Paulson in 2014 “My concern is mainly reform and related issues. To enjoy good environment for development in China, we also need a good external environment. So our path will be a peaceful one.”

Despite China’s recent assertiveness deliberatively seeking out conflict especially with the US would be stupid. None the less they are running the risk of jeopardising their economic interests through a military or security conflict in the region. For their part China abuts four major powers with which it has fought wars, skirmishes or proxy battles over the last 75 years: Japan, India, Russia and the US. 

China has done very well inside the global economic and governance system largely shaped by America after Word War II. But there should be no illusions that China will simply accept this system in its exact form forever. Indeed China has been testing alternatives. In the final analysis the self induced weakness is more of a problem for the US than for China. Once the US has dealt with its own problems it will find it far easier to deal with China. “Dealing with China” is a highly engrossing and captivating book unmasking the new economic superpower.